IMF, World Bank, markets, investors, analysts celebrate Naira’s freedom

• Market sentiments rise on CBN forex reforms
• PwC’s Oyedele: Short term, long term outlook
• CPPE’s Yussuf: investment, jobs, capital flows

The World Bank and the International Monetary Fund (IMF), the two Bretton Woods institutions that have spent at least 20 years breathing down Nigeria’s neck to let its currency, the Naira free, are today still in celebratory mood joined by domestic analysts and the markets who continue to express joy over the decision by the new government of President Bola Tinubu to reform the country’s foreign exchange policies through the Central Bank of Nigeria (CBN).

The head of the IMF Nigeria office, responding to the reforms, said: “The Fund greatly welcomes the authorities’ decision to introduce a unified market-reflective exchange rate regime in line with our long-standing recommendations. We stand ready to support the new administration in implementing FX reforms.”

Ari Aisen, resident representative, who signed a statement of solidarity and support, also immediately offered that it would continue to support the federal government with recommendations to mitigate the economic effects of forex reforms implementation.

The World Bank had earlier, with regards to the other policy it had always wanted to see go, fuel subsidy, offered $800 million loan facility to the country to use for a palliative programme the government plans to put in place.

But reforms in Nigeria’s handling of its foreign exchange policy had been a major sore point between the country and the multilateral institutions, as well as the local markets and many players in the economy. Years of operating multiple foreign exchange markets had produced serious distortions in the pricing of the currency and sent confusing signals to both local and international investors who were often unable to plan effectively.

It is understood that the destination of the reform is a unification of all the rates out there where the naira is priced against foreign currencies. The different rates, especially with the gap between what was then known as ‘official’ rate and the parallel market rate, opened the system up for corruption with arbitraging and round tripping  rife, creating overnight millionaires and billionaires who had no tangible businesses in the economy.    

The modifications introduced now largely means that the  country is now operating a foreign exchange system that is free floating as commercial banks across the country have been directed by the CBN  to  trade foreign exchange freely on the Investors and Exporters  FX window at market-determined rates than previously when they traded with caps. The development is also expected to allow the naira to find a market level against the dollar and other global currencies. This is as buyers and sellers of foreign currency in the official FX markets can now quote rates based on the forces of demand and supply rather than rates dictated by the CBN. 

However, the country’s apex bank maintained  that the status quo remains on the 43 non-eligible items banned from the forex market introduced under Godwin Emefiele leadership as CBN Governor. It stated that the items are not permitted to be funded from the I & E window.

The move to put an end to the country’s multiple forex rates regime has drawn reactions from industry experts and analysts who dwelled on the implication on the country’s economy. 

Analysts at professional services firm PriceWaterhouseCoopers (PWC), projected that the modifications being implemented by the  CBN would have negative impacts on the economy in the short run. They, however, raised optimism that expected positive impacts will ensue in the long run after normalcy is restored.

Listing the expected impacts the sweeping changes are likely to trigger, the analysts  predicted a significant rise in the government’s external debt of $42 billion in naira terms by about N12 trillion to N90 trillion.

Taiwo Oyedele, fiscal policy partner and Africa tax leader at PWC, explained that this implies that the government’s external debt of $42 billion will increase by the difference between the old and new rates, leading to  about a 5 per cent increase in debt to GDP ratio.

Oyedele further noted that there will be a corresponding increase in debt service cost concerning foreign debt service.

On the other hand, he pointed out that the government’s revenue increase in naira terms will result in a higher tax/revenue to GDP ratio. He, however, noted that corporate tax collection may likely decline as many businesses crystallise forex losses due to the higher exchange rate.

Oyedele also hinted at a possible reduction in the budget deficit if the government’s forex revenue exceeds foreign currency obligations, but added that an increase in the budget deficit will arise if otherwise.

Highlighting some of the significant economic advantages of the CBN’s modification, the tax expert noted  that there would be some cost savings as the government discontinues the various forex interventions such as the Naira4Dollar scheme, and the RT-200 scheme which cost tens of billions of naira.

Furthermore, he said that it is expected that the country will attract forex inflows, especially from portfolio investors, foreign direct investors (FDI), and exporters’ proceeds and diaspora remittances.

Oyedele also expressed optimism that the capital market is expected to benefit from the unification of exchange rates as the market which has been rising significantly is likely to appreciate further as foreign investors move in to take position.

“There should be negligible impact on the general prices of goods and services as products are already factored in parallel market rates to a large extent,” he added. 

The tax expert advised the government on the need to manage the dynamics to restore confidence. He added that the backlog of forex demands needs to be addressed and the government should be ready to supply forex to stabilise the exchange rate in the short term.

He also called on the government to relax capital control and administrative bottlenecks including unbanning the list of items prohibited for fx and complement with higher import duties, remove the need for certificate of capital importation to prevent the parallel market rate from simply moving further away from the official market rate. 

In its assessment of the latest monetary policy step of the CBN, the Centre for Promotion of Private Enterprise (CPPE), described the exchange rate unification as a bold step by the new administration of President Bola Tinubu.

Highlighting the economic benefits to be witnessed as ripples of the policy, the organisation said the liberalisation of the foreign exchange market would unlock the huge potentials for investment, jobs and capital flows.

According to the CPPE, a unified exchange rate regime enhances liquidity in the foreign exchange market, reduces uncertainty in the foreign exchange market and therefore enhances the confidence of investors.

It further noted that the move is more transparent as a mechanism for forex allocation and it minimises discretion in the allocation of forex and reduces corruption vulnerabilities.

Other benefits, according to the centre, are that it reduces opportunities for round tripping and other sharp practices and would increase disclosures with respect to export proceeds and compliance with non-oil export declarations, especially the non-oil export documentation (NXP).

“The use of naira cards for limited international transactions would be restored in the short to medium term. It would facilitate the mopping up of naira liquidity in the economy in the short to medium term. This would impact positively on inflation outlook,” it added.

Muda Yusuf, chief executive officer of the CPPE, noted that the development is a step in the right direction.

Yusuf said it would initially  lead to a depreciation of the currency in the official window in the short term because of the huge demand backlog, but the rate would eventually moderate as the market conditions normalise and move towards equilibrium. 

The former director general of the Lagos Chamber of Commerce and Industry (LCCI), maintained that the new policy regime will boost inflows and strengthen the supply side amidst elevated investors’ confidence.

He further stated that the component of forex demand driven by arbitrage, rent seekers, speculators, and other economic parasites would also fizzle out, thus restoring stability to the forex market.

Yusuf, therefore, advised the CBN to position itself for periodic intervention in the forex market, as and when necessary, to stabilise the exchange rate and prevent volatility. 

“This should happen not by fixing rates, but by boosting supply to the extent that the reserves can support,” he said.

The CBN announced wide ranging changes to operations in the Nigerian Foreign Exchange (FX) Market, which are expected to streamline and enhance the efficiency of the market.

The  development was contained in a circular by the apex bank titled: “Operational Changes to the Foreign Exchange Market,” signed by  Angela Sere-Ejembi, the director of financial markets, and dated June 14, 2023.

Giving perspective to the operational changes of the foreign exchange market, the CBN  stated that applications for medicals, school fees, BTA/PTA, and SMEs would continue to be processed through deposit money banks, effectively eliminating the need for multiple segments within the FX market. 

With the introduction of the “Willing Buyer, Willing Seller” model at the I&E window, the CBN explained that under this model, all eligible transactions will have access to foreign exchange at the window, adhering to the guidelines specified in the circular dated 21 April 2017.

To determine the operational rate for government-related transactions and ensure consistency and transparency, the CBN  stipulated that such transactions shall be based on the weighted average rate of the preceding day’s executed transactions at the I&E window, calculated to two decimal places.